Tuesday, September 06, 2011

In a letter to the SEC, the ABA Federal Securities Regulation Committee urged the Commission to continue to stay the effectiveness of the amendments to Rule 14a-8, and either repropose the amendments or reopen the comment period relating to those amendments in order to more fully consider their implication in the absence of the proxy access rule, Rule 14a-11, which was recently vacated by a panel of the DC Circuit Court of Appeals. According to the Committee, the policy considerations for maintaining the stay on the Rule 14a-8 amendments are even more compelling in the wake of Rule 14a-11 being invalidated. Maintaining the stay on the Rule 14a-8 amendments avoids potentially unnecessary costs, regulatory uncertainty and disruption, emphasized the Committee, while allowing the SEC to evaluate and document its consideration of the operation and implication of those amendments to Rule 14a-8 in the absence of the proxy access rule.

The amendments to Rule 14a-8 would generally enable shareholders to require companies to include in their proxy materials shareholder proposals that would amend a company’s governing documents regarding director nomination procedures or disclosures related to shareholder nominations. A panel of the DC Circuit ruled that the SEC was arbitrary and capricious in promulgating the proxy access rule, Exchange Act Rule 14a-11, and vacated the rule. Among other things, the appeals panel found that the SEC’s discussion of the estimated frequency of nominations under Rule 14a-11 was internally inconsistent and therefore arbitrary. Business Roundtable and Chamber of Commerce v. SEC, DC Circuit, No. 10-1305, July 22, 2011. The term proxy access is shorthand for a framework of rules under which a shareholder may require the corporation to include in its proxy statement and proxy card a person nominated by the shareholders, but not by the board of directors, for election to the board.

In its letter to the SEC, the Committee said that it is important to the SEC’s processes and statutory mandates to assess whether, in the absence of the proxy access rule, Rule 14a-8 would operate as intended and whether, in this very different context, the Commission’s assessment of the amendments to Rule 14a-8 satisfies the standards of the Administrative Procedures Act. Throughout the Adopting Release, said the Committee, it appears that the Commission assumed the effectiveness of Rule 14a-11 when evaluating the operation of the amendments to Rule 14a-8, including in the Commission’s analysis, among other things, of the cost burdens resulting from the amendments to Rule 14a-8 and the benefits and costs of the economic effects of the amendments.

With the invalidation of Rule 14a-11, reasoned the Committee, the amendments to Rule 14a-8, if allowed to go into effect, would be operating in an entirely different context than what was contemplated at the time they were adopted. In light of the changed context, the ABA group urged the Commission to reconsider and reevaluate the operation and implications of the Rule 14a-8 amendments.

In the adopting release, the Commission noted that the costs associated with its adoption of amendments to Rule 14a-8 may be limited to the extent that shareholders do not submit proposals related to director nomination procedures due to the uniform applicability of Rule 14a-11 to all companies subject to the rule and availability of the rule for eligible shareholders. Similarly, the Commission said that it had no reason to expect that the amendment to Rule 14a-8(i)(8) would substantially increase the number of shareholder proposals to smaller companies and likely will have little impact on small entities.

The SEC relied on that conclusion in determining not to change the eligibility requirements for submitting Rule 14a-8(i)(8) shareholder proposals at small companies. However, absent the opportunity to submit director nominations pursuant to Rule 14a-11, posited the Committee, it is not unreasonable to expect that shareholders will pursue change through the Rule 14a-8 route. It is not clear to the Committee whether, against this backdrop, the Commission’s analysis and conclusions remain apposite.